Getting new credit or a loan during your Chapter 13 bankruptcy case is difficult. However, in certain limited circumstances, it may be possible. In most cases, you'll have to get prior approval from the Chapter 13 trustee or court. You will probably need to be current on your plan payments at the time the request is made and not be making the request to cure a delinquency. The factors that the court or trustee will consider include:
- the type of credit (consumer vs. business)
- the purpose for incurring the debt, and
- the impact it will have on your Chapter 13 plan.
In the context of Chapter 13, new consumer credit basically covers any situation where you take out a loan, agree to an installment payment, or incur bills that you are unable to pay in full when they are incurred. It also includes situations where you guarantee a debt for someone else or co-sign a loan.
Generally Prohibited. You will likely be offered consumer credit during your Chapter 13 bankruptcy but, absent a genuine emergency or trustee or court permission, it may be best to avoid temptation. It is not likely that the trustee or the court will authorize you to incur new consumer credit without a showing of special circumstances. And if you incur consumer credit for a non-emergency without court authorization, your Chapter 13 case could be dismissed and you will not receive a discharge or accomplish any of the other purposes for your filing. In many districts, a prohibition against post-petition credit is clearly set out in the order confirming your plan to avoid confusion.
Need for Court Authorization or Trustee Approval. Most courts require that you get prior authorization for new credit. Some districts and some individual trustees provide general guidelines to debtors seeking approval for new credit. Check your trustee’s website.
What if You Don't Get Prior Approval? If you incur debt or get credit without prior authorization, the court may view this as an indication that you are unable to comply with the terms of your plan or that you are not contributing the full value of your available disposable income to your plan. The court might dismiss your case or refuse to include the new debt in your bankruptcy, which means you won't be able to discharge it in your Chapter 13 if you can't pay it.
Circumstances Where the Court Might Approve Consumer Credit
Although post-petition consumer credit is generally not allowed, there are some exceptions to this rule. The exceptions are limited to situations involving genuine emergencies or special circumstances.
Genuine Emergencies. In the case of a genuine emergency it will not be possible to obtain prior approval and none is expected under the bankruptcy law. However, it may be a good idea to inform the trustee as soon as possible after the emergency has been resolved -- you may need to modify the plan to include the additional expense and the creditor may need to file a proof of claim. Genuine emergencies usually involve catastrophic medical events but could involve emergency measures necessary to protect your home or other property in case of a storm or accident.
Special Circumstances. These are situations where there is time to seek approval or authorization and because of the particular nature of the circumstances, the post-petition consumer credit is approved or authorized. Probably the most common example is incurring credit to purchase a replacement vehicle. Other examples include non-emergency but necessary home repairs (such as roof repairs), and appliance or heater replacements. In these cases, the trustee or the court will generally look at factors including:
- whether it is necessary that the repair or replacement occur before the plan is completed
- the amount of the new loan and the impact on your plan (ability to pay), and
- whether the loan is unsecured or secured.
Secured or Unsecured New Credit
Debt incurred on an emergency basis is usually unsecured but other types of post-petition consumer credit, such as a car loan, home repairs, or appliance or furniture purchases will likely involve giving the creditor a security interest in your property. Courts and trustees are reluctant to approve financing that provides the new creditor with a security interest in pre-petition non-exempt assets because the value of that property is what protects creditors if you fail to successfully complete your Chapter 13 plan. But if borrowing preserves value in the property (such as a roof repair), it may be allowed.
The law is different when business credit is involved. In Chapter 13, business credit is defined as any delayed payment transaction incurred in connection with the operation of your business.
Credit Incurred in the Ordinary Course of Business. In Chapter 13, the bankruptcy law specifically allows you to continue to operate your business without having to obtain court orders authorizing you to do what you need to do to operate on a daily basis. You are allowed to incur ordinary business credit on normal terms without court authorization or trustee approval. For example, you will not need a court order to purchase inventory on routine terms which require payment in 30 or 60 days.
Credit Terms Outside the Ordinary Course of Business. You will need to get prior court authorization if you are seeking to incur debt which is not a regular occurrence in your business. An example might be the replacement or addition of a new delivery truck or the purchase or new machinery. You will need to file a motion to authorize the transaction before it is finalized and show the trustee, the court, and your creditors that the item is necessary, you can afford to make the payments, and it will not negatively (and perhaps will positively) impact your ability to comply with the terms of your plan.